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Research reveals overlooked factor driving China’s real estate crisis

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Research reveals overlooked factor driving China's real estate crisis
Residential buildings developed by Evergrande in Yuanyang County, Henan. Credit: Windmemories – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=101099032

The default of Evergrande, one of China’s largest developers, set off a chain of defaults among developers, triggering the ongoing property market crisis in China.

While analysts frequently attribute the crisis to China’s tax system, land finance, state intervention, and various other factors, recent University of Michigan research has revealed an often overlooked aspect–the concentrated nature of the real estate industry.

The research, led by Lan Deng, professor of urban and , examined China’s real estate industry from the early 2000s to 2018. It found that the industry became increasingly concentrated, with large firms accounting for a growing share of the country’s production, which played a significant role in the market’s downturn.

For instance, the top five real estate developers in China accounted for 30% of the country’s total housing production in 2018, compared to a share of 13% in the U.S. Housing production in the U.S. was only about a quarter of what China has produced in the last decade.

The China Real Estate Top 10 Research Group further highlights this concentration–among 10,000 registered real estate development firms in the country, the market share of the top 100 firms, as measured by sales revenue, increased from 28% in 2012 to 58% in 2018.

The repercussions of such conglomerates failing are wide-ranging, as demonstrated by Evergrande and Country Garden, the top two property developers in China. Evergrande, once boasting an annual construction of 72 million square meters, filed for bankruptcy protection in August 2023.

Country Garden, whose annual housing production was about twice the size of Evergrande before the pandemic, defaulted in October 2023 and faced a liquidation petition from its creditor the following year, according to the latest news reports. The collapse of these industry leaders has placed a drag on the entire Chinese property market.

The concentration of the real estate sector in China was mostly due to the advantages large developers enjoy, according to the study. Large developers often had access to low-cost capital. In China, all major banks are state-owned and banks’ ability to lend is thus heavily regulated by the state.

Concerned about the country’s economic overdependence on the real estate industry, the state-mandated only developers assessed as low risk could obtain bank loans–these were typically large developers with direct or indirect ties to the state.

Another factor that contributed to the concentration was China’s presale model in the property market. Under the presale model, buyers’ down payment, as well as their mortgage loans, are transferred to developers during the development process, which are then used as development capital. Because of the risks associated with presales, homebuyers in China would prefer purchasing housing from with established records.

China’s open land market system also favored large developers. In China, land is owned by the state and is sold to the highest bidder via an auction process. As a result, only developers with sufficient financial resources can win the bid–usually, they are large developers. Since 2006, the Chinese central government has imposed a land quota system that limits the amount of land can supply for urban development.

As a result, from 2004 to 2018, the annual increase in land cost averaged about 17%, while the average annual increase in housing price was about 9%. That land cost has risen at a much faster pace than housing prices indicates a declining profit margin for real estate development over time, making it difficult for small developers.

“The concentration of the real estate industry not only exacerbates challenges for the but also brings negative impacts to local economies,” Deng said.

The real estate sector contributed around 20% of China’s GDP. Large developers often expanded nationally, looking for new development opportunities outside their home cities, especially in regions with lower land costs, leading to housing oversupply in those places.

For instance, China’s top 30 real estate development firms were building across an average of 80 cities in 2017, compared to an average of only five cities in 2003. Evergrande has grown from building in 25 cities in 2009 to building in 228 cities in 2018.

As firms expanded across cities, real estate development was less of a local business, as profits earned through local residents’ home purchases were often sent back to those firms’ headquarters, which are usually located in more prosperous regions, contributing to the rising regional disparities, the study found.

Furthermore, when local markets turn in a negative direction, those large national firms could quickly withdraw their investment from less-developed places, as seen during the COVID-19 pandemic. This exposes local economies, often reliant on real estate as a growth engine, to dire consequences with little development activity, according to the study.

The study is published in the journal Housing Studies.

More information:
Lan Deng et al, Housing production and the structural transformation of China’s real estate development industry, Housing Studies (2024). DOI: 10.1080/02673037.2024.2334797

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Research reveals overlooked factor driving China’s real estate crisis (2024, April 30)
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Greater Toronto home sales jump in October after Bank of Canada rate cuts: board

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TORONTO – The Toronto Regional Real Estate Board says home sales in October surged as buyers continued moving off the sidelines amid lower interest rates.

The board said 6,658 homes changed hands last month in the Greater Toronto Area, up 44.4 per cent compared with 4,611 in the same month last year. Sales were up 14 per cent from September on a seasonally adjusted basis.

The average selling price was up 1.1 per cent compared with a year earlier at $1,135,215. The composite benchmark price, meant to represent the typical home, was down 3.3 per cent year-over-year.

“While we are still early in the Bank of Canada’s rate cutting cycle, it definitely does appear that an increasing number of buyers moved off the sidelines and back into the marketplace in October,” said TRREB president Jennifer Pearce in a news release.

“The positive affordability picture brought about by lower borrowing costs and relatively flat home prices prompted this improvement in market activity.”

The Bank of Canada has slashed its key interest rate four times since June, including a half-percentage point cut on Oct. 23. The rate now stands at 3.75 per cent, down from the high of five per cent that deterred many would-be buyers from the housing market.

New listings last month totalled 15,328, up 4.3 per cent from a year earlier.

In the City of Toronto, there were 2,509 sales last month, a 37.6 per cent jump from October 2023. Throughout the rest of the GTA, home sales rose 48.9 per cent to 4,149.

The sales uptick is encouraging, said Cameron Forbes, general manager and broker for Re/Max Realtron Realty Inc., who added the figures for October were stronger than he anticipated.

“I thought they’d be up for sure, but not necessarily that much,” said Forbes.

“Obviously, the 50 basis points was certainly a great move in the right direction. I just thought it would take more to get things going.”

He said it shows confidence in the market is returning faster than expected, especially among existing homeowners looking for a new property.

“The average consumer who’s employed and may have been able to get some increases in their wages over the last little bit to make up some ground with inflation, I think they’re confident, so they’re looking in the market.

“The conditions are nice because you’ve got a little more time, you’ve got more choice, you’ve got fewer other buyers to compete against.”

All property types saw more sales in October compared with a year ago throughout the GTA.

Townhouses led the surge with 56.8 per cent more sales, followed by detached homes at 46.6 per cent and semi-detached homes at 44 per cent. There were 33.4 per cent more condos that changed hands year-over-year.

“Market conditions did tighten in October, but there is still a lot of inventory and therefore choice for homebuyers,” said TRREB chief market analyst Jason Mercer.

“This choice will keep home price growth moderate over the next few months. However, as inventory is absorbed and home construction continues to lag population growth, selling price growth will accelerate, likely as we move through the spring of 2025.”

This report by The Canadian Press was first published Nov. 6, 2024.

The Canadian Press. All rights reserved.

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Homelessness: Tiny home village to open next week in Halifax suburb

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HALIFAX – A village of tiny homes is set to open next month in a Halifax suburb, the latest project by the provincial government to address homelessness.

Located in Lower Sackville, N.S., the tiny home community will house up to 34 people when the first 26 units open Nov. 4.

Another 35 people are scheduled to move in when construction on another 29 units should be complete in December, under a partnership between the province, the Halifax Regional Municipality, United Way Halifax, The Shaw Group and Dexter Construction.

The province invested $9.4 million to build the village and will contribute $935,000 annually for operating costs.

Residents have been chosen from a list of people experiencing homelessness maintained by the Affordable Housing Association of Nova Scotia.

They will pay rent that is tied to their income for a unit that is fully furnished with a private bathroom, shower and a kitchen equipped with a cooktop, small fridge and microwave.

The Atlantic Community Shelters Society will also provide support to residents, ranging from counselling and mental health supports to employment and educational services.

This report by The Canadian Press was first published Oct. 24, 2024.

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Here are some facts about British Columbia’s housing market

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Housing affordability is a key issue in the provincial election campaign in British Columbia, particularly in major centres.

Here are some statistics about housing in B.C. from the Canada Mortgage and Housing Corporation’s 2024 Rental Market Report, issued in January, and the B.C. Real Estate Association’s August 2024 report.

Average residential home price in B.C.: $938,500

Average price in greater Vancouver (2024 year to date): $1,304,438

Average price in greater Victoria (2024 year to date): $979,103

Average price in the Okanagan (2024 year to date): $748,015

Average two-bedroom purpose-built rental in Vancouver: $2,181

Average two-bedroom purpose-built rental in Victoria: $1,839

Average two-bedroom purpose-built rental in Canada: $1,359

Rental vacancy rate in Vancouver: 0.9 per cent

How much more do new renters in Vancouver pay compared with renters who have occupied their home for at least a year: 27 per cent

This report by The Canadian Press was first published Oct. 17, 2024.

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